Faculty in the Field

After three days of hearing oral arguments on the legality of all, or parts, of the Patient Protection and Affordable Care Act (ACA), the Supreme Court is hopeful of rendering its decision in June. Based on what we’ve heard so far, it doesn’t bode well for the ACA. The primary issue of contention is the inclusion of an “insurance mandate” whereby citizens are required to purchase health insurance or pay a penalty. The mandate seems to be the linchpin of the reform act; without this requirement will insurance premiums skyrocket and will access to health insurance be limited? This also raises the question of severability. If the mandate is struck down, will the entire ACA also be invalidated or can parts of it survive? Will the law’s popular “guarantee issue” and “community rating” provisions survive without the mandate that virtually all Americans must have health insurance? Guarantee issue prevents insurers from discriminating against people with pre-existing conditions and community rating standardizes insurance premiums for those living in the same area. The states that have attempted to enact guarantee issue and community rating systems without instituting mandates saw their health reforms fail – insurance premiums skyrocketed, consumers had fewer choices and the number of uninsured went up.

So, what is the insurance industry to do? Insurers must prepare for a worst-case scenario – a ruling that the individual mandate is unconstitutional, but insurers still must provide policies for all people. In that situation, insurers say premiums will rise sharply because of people with chronic illnesses and pre-existing conditions, for example, would buy health coverage, but healthy people would not. Short of persuading Congress to write a new law, the insurers are considering certain contingencies including:

– Penalizing those who enroll outside of short annual windows

– Denying treatment for specific conditions, especially right after a policy is purchased

– Rewarding certain insurance buyers, such as offering much lower premiums for younger and healthier people

There remains, however, a divided opinion about the exclusion or inclusion of the individual mandate in the health reform act. Some believe that its exclusion will cripple the ACA and all of its proposed benefits, while others contend that the penalty associated with the mandate is not onerous enough to deter individuals from not purchasing health insurance.

Things are never as simple as they seem to be. The good intention of the current administration to increase access to health insurance coverage for all individuals at affordable pricing may not be good enough to preserve the goals of the ACA. Do you throw out the baby with the bath water if the entire plan is deemed unconstitutional? Do you preserve part of plan and try to make the best of the remaining regulations? Or, do you leave the ACA as is and have the first meaningful health care reform since the Great Society? Only SCOTUS can let us know.

* Supreme Court of the United States

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

The now-defunct so-called congressional “super committee” that was charged with the task of identifying deficit reductions received several recommendations that would create significant health care savings over a ten year period. Despite the failure of the committee to successfully achieve its mandate, it is well worth exploring the cost reduction suggestions the committee received from health care executives. These chief executives of both for-profit and not-for-profit health care companies, members of the Healthcare Leadership Council (HLC), presented a set of reform proposals that would not only generate $410 billion in savings over 10 years, but would also strengthen Medicare’s long-term sustainability. In fact, according to Mary R. Grealy, president of HLC, “the reform recommendations will contribute to deficit reduction without placing an unfair or disproportionate burden on patients, healthcare consumers, or our most vulnerable citizens.”

HLC’s recommendations to the “super committee” included:

Create a new “Medicare Exchange” in which private insurance plans would compete on the basis of cost, quality, and value.

While acknowledging that this recommendation would be compared to the Medicare reform concept contained in Congressman Paul Ryan’s proposed budget, the HLC indicated that the differences include the fact that there Medicare beneficiaries would have the option of staying in traditional fee-for-service Medicare and there would be a more generous inflation factor – growth in GDP plus one percent – for premium subsidies.

The thought behind this proposal is that Medicare beneficiaries should have the same freedom of choice as Medicare Part D prescription drug program participants, federal employees and members of Congress participating in the Federal Employees Health Benefits Program, and those who will utilize the new state-level insurance exchanges created as part of the Affordable Care Act. The competitive environment will require healthcare providers, plans, manufacturers, and distributors to achieve greater cost-efficiencies while still offering quality and value to beneficiaries.

As Ms. Grealy stated: “ If given the choice between deeper provider cuts, which will reduce patient access to care, and reducing costs by using consumer choice to incentivize cost-effective innovation, it doesn’t seem like a difficult decision.” However, does it seem similar to the public option plan that was vigorously opposed when being considered as part of the ACA? And, can competition be the driver of health care cost reductions in an imperfect market place?

Gradually increase the Medicare eligibility age from 65 to 67.

As more Americans remain healthy over a longer period of time, this transition would mirror the increase in the Social Security retirement age and reflect today’s longer average lifespans. The increase would be implemented over roughly a decade, raising the eligibility age by two months annually. The shrinking ratio of active workers to Medicare beneficiaries makes this change inevitable. The Affordable Care Act makes such a change possible in that Americans in their mid-60s not yet eligible for Medicare would be able to purchase health insurance on the new state exchanges without their health status affecting their ability to acquire coverage. But at what cost? More than the price of Medicare Part B premium coverage?

Reform Medicare’s cost-sharing structure.

This reform would involve making the Medicare Part A and B beneficiary cost-sharing uniform, with a reasonable deductible and co-pays as well as a cap on annual out-of-pocket costs. This would make Medicare costs more predictable and consistent for beneficiaries while also ensuring that seniors wouldn’t be devastated by catastrophic care costs or faced with limits on hospital stays. Another part of this proposal would be a requirement that individuals with incomes of $150,000 and greater pay their full premium costs for Medicare Parts B and D. Supposedly, this would affect less than 3% of Medicare beneficiaries and would generate budget savings while protecting financially vulnerable beneficiaries. Uh-oh. Is this an “us against them” issue?

Implement medical liability reform.

HLC members recommended liability reform measures including a cap on non-economic damages in medical malpractice cases, a one-year statute of limitations from the point of injury to the filing of litigation, and a “fair share” rule to have defendants pay damages commensurate with their responsibility for the injury involved. Acknowledging the partisan difficulty in advancing tort reform legislation, alternative approaches including linking liability protections to healthcare providers’ use of health information technology and practice of evidence-based medicine should be considered.

The above four recommendations would generate just over $410 billion in budget savings over a ten-year period, based on Congressional Budget Office estimates and other published budget projections. Alas, the “super committee” wasn’t so super after all and could not generate a program acceptable to the partisan participants. But, should that mean that some worthwhile recommendations not be explored further with the thought of strengthening our healthcare system? Or do we slowly move along and be subject to on-going sequestration reimbursement rate reductions?

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

With health care reform requiring close scrutiny of financial performance, hospital and health systems are closely examining ways to reduce spending. Following is one person’s thoughts about how fiscal responsibility can be achieved:

1. Mergers and Consolidations

Mergers and acquisitions in the health care sector are at an all-time high in terms of dollar value. Hospitals and physicians are no doubt integrating and other providers are combining and coordinating care delivery models in response to the current and expected changes resulting from health care reform. There are experiments in reimbursement and payment methodologies that should lead to fiscal sanity but can also lead to a concentration among providers. Some believe that this will lead to less expensive care while others argue that it will lead to monopoly and its attendant effects on the health care financial landscape. What do you think?

2. Reduced Readmissions

Tied to reimbursements, readmission rates are the target of hospitals to reduce the number of patients for the same condition. Previous studies have found that a number of things can help reduce readmissions, such as home health use after hospitalization, patient engagement and education, use of nurses for patient follow-up, and remote health monitoring. Hospitals should be focused on reducing readmissions and unnecessary admissions for conditions that probably would not have led to an admission if the person had gotten proper primary care. Will accountable care organizations help in this regard?

3. Comparative Effectiveness Research

As leading institutions continue to look at evidence-based medicine and patient outcomes, new research is being developed about what is most effective. A most hopeful trend is occurring in health systems where they are really looking in detail at examining what doctors actually do and what the results are in terms of outcomes and then feeding it back into the system. Look into Geisinger and Kaiser Permanente as leaders in this practice. but, will this be widely accepted by physicians as their medical decisions and care are more frequently scrutinized?

4. Care Coordination

With initiatives already in motion for accountable care organizations and patient-centered medical homes, more attention will focus on outcomes from care coordination and managing the entire care spectrum of the patient. There is a trend to reimbursing health care providers based on outcomes instead of paying for more care. Will the government (read Medicare and Medicaid) focus on this paradigm of paying providers or will extraordinary pressure be exerted by various advocacy organizations to maintain fee for service reimbursement?

5. Collaborative Communication

With increasing requirements for compliance, hospitals and providers will need to collaborate in their communication efforts. New ways to work together will evolve resulting in more lines of communication. Hopefully, the expansion of health information technology will lead to virtual connections between providers. But at what cost and in what time frame?

And so it goes. Payors are aligning with providers either through acquisitions or other creative forms of working together. With increased emphasis on outcomes-based medicine, companies that provide care coordination oversight and patient care management will assume more importance in the health care cycle. Was Humana prescient in its acquisition of SeniorBridge Family of Companies with the strategy of positioning them to favorably respond to the changing health care environment? Will others follow? Stay tuned.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

The Patient Protection and Accountable Care Act (PPACA) has unleashed a flurry of activity by health care providers and executives in response to some of its provisions. While the PPACA primarily addresses the issue of access to health care services by patients, it also touches on the areas of cost-cutting, reimbursement and improvement in quality of care. This article will refer to some strategies for hospitals to consider in adapting to the changing health care climate. Future articles will indicate five cost-cutting health care trends to watch and will provide a list of recommendations for savings developed by health care executives that were submitted to the now-failed “Super-Duper Congressional Deficit Reduction Committee”.

Hospitals and health systems are developing and implementing strategies to adapt to the dynamic health care environment. The American Hospital Association Committee on Performance Improvement recently issued a report on priority strategies for hospitals and health systems of the future, which included responses from health care executives, which should be undertaken in the coming decade. The top four are:

Aligning hospitals, physicians, and other providers across the care continuum: Described as a shifting paradigm from “competition to interdependency”, according to the report, aligning providers across the care continuum is essential to true partnerships and care coordination. This can include shared savings incentives and sharing of data. Wenatchee (Wash.) Valley Medical Center held meetings with all providers and acted on their suggestions.

Utilizing evidence-based practices to improve quality and patient safety: Quality is directly tied to reimbursement, especially as hospitals with high readmission rates will be penalized starting in 2013. Hospitals need to improve outcomes and should employ multi-disciplinary teams to review cases that failed with the goal of modifying processes accordingly. Flowers Hospital in Alabama was able to achieve a more than 99% compliance rate with CMS core measures, tied to its financial reimbursements.

Improving efficiency through productivity and financial management: Hospital executives are looking for ways to cut redundant efforts and standardize processed to cut costs and improve patient care. North Mississippi Medical Center sought to improve patient satisfaction in the ED around wait times by implementing bedside triage, allowing for X-ray viewing abilities in each patient room, and installing a computerized tracking system to increase patient flow

Developing integrated information systems: While health IT is critical to connecting providers with information in real time, in addition to owning the technology, hospitals and health systems must perform sophisticated data mining and analysis for continuous improvement in patient care and for the organization. Piedmont Clinic in Atlanta, using several sources of electronic data, created a single data warehouse with information on patient satisfaction, core measures, physician quality reporting, population health statistics, and billing. In addition, Piedmont provided daily updates about the critical data.

Change is inevitable and will occur. What will vary is each organization’s journey to develop responses to these changes.

In next month’s column, I will suggest five cost-cutting health care trends to watch and, perhaps, what cost-cutting measures health care leaders suggested to the now-defunct Congressional Deficit Reduction Committee.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

Last month’s blog contained information about valuation and value drivers for health care companies. In this posting, the strategies that can be used to enhance the value of an M&A transaction is discussed.

After a decision has been made to sell the business, owners ask what strategies they can implement to enhance the value of the transaction in addition to those indicated above. Some of those include:

- defining your business, personal, and financial goals – This drives the comprehensive divestiture strategy. The seller has to consider what he or she can realistically expect in the future. What does the seller want to do post transaction? What are the seller’s financial requirements? Am I suffering burnout? A clear understanding of these goals is the foundation for a successful transaction.

-exerting control and influence over the content and flow and information. It is imperative to present the company in its best possible light to qualified buyers and to control the timing of the release of information.

-identifying the correct sources of value – While revenues and profits are the drivers of fair market value, buyers are looking for strategic opportunities. This is the basis of investment value and translates into a higher purchase price. The goal here is to distinguish between fair market value and investment value.

-managing weaknesses in your business – No company does things perfectly. Buyers are aware of this and expect to see some “warts” on the face of the business. A seller should identify the weaknesses, develop a course of correction, and reveal these to the buyer. This strategy reduces the uncertainty a buyer may have that there are other problems in the company and also compartmentalizes the weaknesses from other aspects of the business’s operations. The effect: the perceived risk in acquiring the company is reduced to the buyer which results in increased value and pricing.

-creating a critical mass of buyers – The larger the pool of qualified buyers, the more likely that there will be more than one offer received for the company. This creates a competition between buyers that result in a higher purchase price.

-orchestrating simultaneous presentations – Maintaining control over the timing and distribution of information is critical to managing the mergers and acquisition process. Strategic dissemination of materials can create a competitive bidding situation that will likely result in increased value.

-know the buyer – Play to the strategic interests of the qualified buyers that have been identified as potential acquirers of the company. This tends to improve your negotiating position – you are meeting a need of the buyer – and creates higher investment value for the company (N.B. investment value always exceeds fair market value).

-setting expectations high – The higher you aim, the better the result. Know your sources of power – the strengths, performance, and reputation of the company; the competition in the market place; your ability to exhibit time and patience – and utilize them to achieve higher value.

-paying attention to the deal structure – What exactly is the buyer buying? Is it a stock or asset deal? What are the components of the purchase price? Remember to discount non-cash remuneration and carefully evaluate “earnouts” or payments contingent upon achieving certain parameters.

-working the letter of intent to closing – Prepare well for due diligence – make it easy for the buyer to buy. Be wary of “nibbling” to the “corners” of the purchase price. Carefully scrutinize any post transaction adjustments that can result in a change to the price. Employ counsel wisely including your M&A advisor, attorney, and CPA; when was the last time you sold a business? And, finally, assume the deal won’t close – manage your company like you are not selling because you never know what can happen that can cause a transaction not to close.

You may be wondering how the answer to such a simple question such as “what is my company worth?” is so complex. Selling or acquiring a business is a complex process that combines the aspects of valuation, finance, legal, and emotional matters. If you decide to embark on the M&A process it is wise to engage an experienced professional who can help you achieve your goals and objectives. It would also help if this advisor has the attributes of a good mental health therapist. It can be a grueling ride.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.

Given the uncertainty created by Obamacare, health care companies have begun seeking consolidations through mergers and acquisitions as one of their future survival strategies.

This question of the value of a company frequently arises in conversations with owners, principals, and management of health care entities. “Sure I’d sell my business. Sure I think that we’d make a powerful team. One question, though: How much is the business worth?” The short answer is – it all depends.

To begin to understand the value of a company, the fundamentals of value must be explained. A correct standard of value has to be established. Fair market value fundamentals are based on the average price for the average buyer with neither party compelled to buy or sell and both parties being informed of the relevant facts. Consequently, fair market valuations are typically at the lower range of the market. Investment value fundamentals, however, are based on a specific price for a specific buyer and are based on an investor specific basis. Ergo, value is extremely buyer dependent. A company is worth what a buyer is willing to pay for it. It’s like a home plate umpire in baseball. The batter lets a pitch go by and then asks if it was a ball or a strike. The umpire’s answer: “It’s nothing until I make the call.” It’s the same with the value of a business – it is worth what a buyer is willing and able to pay.

It is not my intention to be facetious about this topic but there is not a clear answer to the question. There are common valuation techniques that establish parameters and metrics for valuing businesses. Among these techniques are the calculation of the Net Book Value of a company, the use of Public Market Comparables, the creation of a Discounted Cash Flow model favored by financial buyers, the use of Comparable Transactions of similar companies if the data is available, and ,the most common metric, the application of a Multiple of Earnings (after the appropriate level of earnings has been established – but that’s for another time). Which leads to the question of how are multiples established? Remember, value is extremely buyer dependent: one buyer may be inclined to assign a higher multiple to earnings than another buyer based on the first buyer’s reasons to complete an acquisition. However, the range of multiples can be tied to the level of risk the buyer is willing to tolerate to “make the deal.” Each buyer has a specific rate of return they would like to achieve from their investments. An acquisition is another form of investment and can this investment earn a return comparable to, or greater than, other investment opportunities.

The range of value and assignment of a valuation metric is dependent on the risk of the investment. The risk reflects the buyer’s required rate of return. The lower the perceived risk, the higher the value metric; the higher the risk, the lower the metric and, intuitively, the lower the price. However, there are determinants of risk that are specific to a company and can be managed by the company. Among these are having:
• diverse referral sources (the more, the better; the company is not overly reliant on one or two sources for its revenue stream)
• a diversified product and revenue mix which can lead to a more predictable revenue stream
• a diversified payer mix – don’t be too susceptible to changes in reimbursement
• the influence of managed care on the company’s revenue stream – This typically
leads to lower reimbursement. If a client of a medical staffing company ( such as a hospital) receives a large portion of its reimbursement from managed care payers they are less able and willing to pay full amounts for your company’s services.
• middle management strength – One of the most harmful things that you can indicate to a prospective buyer is that “you are the business” and that it cannot function without you. Buyers are justifiably concerned that there will be a precipitous decline in revenues post transaction if this exists. It is imperative to develop your management staff to the level of being able to function in your absence.
• knowledge of your current business trends. Is yours a stable and growing business that presents lower risk to a buyer? What are the business trends in your marketplace?
• knowledge of your competitors – Are they aggressively soliciting business? How many competitors are there in your market? The fewer the number of competitors, the more predictable is your company’s revenue stream.
• efficient accounts receivable management – This provides a snapshot of your operating infrastructure and management capabilities to a buyer. The lower your company’s bad debt expense and days sales outstanding (the average time it takes to convert a sale into cash), the more predictable is your revenue stream, the lower is the perceived risk to the buyer, the higher valuation metric can be assigned to your business. Management and control of these company specific determinants of risk to the extent possible will increase the potential purchase price of a company.

Read my post in next month’s blog to learn about what strategies to implement to enhance the value of an M&A transaction.

Joel Wittman is an Adjunct Associate Professor at the Wagner School of Public service of New York University. He is the proprietor of both Health Care Mergers and Acquisitions and The Wittman Group, two organizations that provide management advisory services to companies in the post-acute health care industry. He can be reached at joel.wittman@verizon.net.